A Comprehensive Approach to Tobacco Taxation

A well-established literature attests to the impact of conventional cigarette taxes on both smoking behaviors and government revenue. While similar goals motivate taxes on electronic cigarettes, these policies differ markedly from conventional cigarette taxes. Specifically, conventional cigarette taxes are well-established across the U.S. at both the state and federal level, and are uniformly specified in “dollars per pack” units. Taxes on e-cigarettes have been enacted in only 9 states (as of January 2019) and Washington D.C., with varying structures (percent of wholesale cost vs. per milliliter) and points of assessment (first distribution in the state vs. distributors and consumers). These differences may lead to varying effects on both tax revenue and tobacco use, given distinct opportunities for evasion. To better understand these dynamics and inform U.S. tobacco policy, we (1) use nationally representative data from the Nielsen Retail Scanner Dataset to estimate the effect of both conventional and electronic cigarette taxes on the price of e-cigarettes in brick-and-mortar retail outlets, (2) collect new data from the top 3 retailers’ online sales platforms to directly assess e-cigarette tax collections for representative products by state; and (3) conduct back of the envelope calculations that estimate lost tax revenue under each type of e-cigarette tax. Results provide insight into the expected effects of current e-cigarette taxes on both revenue and consumer behavior, as well as the relationship between conventional and electronic cigarette pricing.